Scripps could help Disney make up for a key demographic shortfall.

Stay Connected

Bazinet highlights the fact that Disney has a vast array of offerings that reach many demographics -- except women, which is where Scripps' strength lies.

Disney has Disney Junior, which makes media for toddlers. Movies from the animation studio Pixar are four-quadrant hits, while Marvel, the comics giant, which the Mickey Mouse company acquired for $4 billion in 2009, is geared toward teenage boys. And Disney-owned ESPN is, of course, a big hit for men.

Through ABC and shows like Dancing With the Stars, Grey's Anatomy ,and Desperate Housewives, the Mouse is able to draw in women, especially older women above 49. However, Bazinet notes that Housewives has ended its run. Scripps, with its hit cable channels Food Network, HGTV, Travel, and DIY, could bring in female viewers with higher margins. Programs on broadcast networks "simply don't ring up the same sort of profits as lesser known shows on cable TV," he says.

The purchase of Scripps, whose channels draw about 1.7 million daily viewers, would grow Disney's cable audience by 50% and importantly, also allow it to decrease its reliance on ESPN. The sports network is a big income generator for Disney because pay TV companies cough up top dollar to carry it, but Bazinet says this revenue model is unsustainable. With the economy stagnant, "it's not clear how many years – or decades – this can last," he says.

Indeed, the recent stand-off between DirectTV (DTV) and content provider Viacom (VIA) shows that pay TV operators are increasingly more resistant to paying high fees to carry content, as they do not want to pass on the costs to customers battered by the weak economy. The cost of purchasing sports content has also soared in recent years, as evidenced by the $1.18 billion NBC (CMCSA) had to pay to broadcast the recently concluded 2012 London Olympics.

Bazinet calculates that Scripps could sell for 12x to 15x its 2011 earnings before interest and taxes at $10.3 billion, or $67.07 per share, which is higher than the stock's current trading price of about $60.

At an acquisition price of around $10.3 billion, Disney could use its stock to buy Scripps, in which case it would have to dilute earnings per share by $0.07 to $0.13, but Disney could compensate by repurchasing stock. Thus, "Disney's stock would only pull back $1-$2 on such a transaction," Bazinet says.

Scripps, based in Knoxville, soared to a 52-week high on Monday, hitting $61.17. After Bazinet's note was released, however, the stock slid a little, and is now hovering just below $60.

Both companies are rated as Neutral at Citi and those ratings will stay the same even after a merger, says Bazinet.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.